Abstract

In simple univariate tests, we find no disposition effect for a stock if the remaining portfolio is at a gain. We find a large disposition effect only when the remaining portfolio is at a loss. The portfolio-driven disposition effect we document is not explained by extreme returns, portfolio rebalancing, simultaneous transactions, or investor sophistication/skill. The evidence suggests investors’ utility comes from both paper gains and losses and realized gains and losses; and when their portfolio has paper losses, they compensate by realizing gains.

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